In the Telegraph, Thomas Pascoe summarizes the situation in Cyprus as of Friday morning:
As it stands this morning, there is a Plan B on the table after parliament voted down the proposal that every bank deposit in the country be subject to a deduction. The new plan only affects those with deposits over €100,000; however, it will require those depositors to take a loss of up to 40pc. As part of this package, the nation’s two large banks will be saved. However, the structure of the deal requires that one of the pair, Laiki, will be split into “good” and “bad” banks, with large depositors left to chance it in the bad bank.
A word on the thinking behind it. While you and I perceive deposits as secure money (and I have argued that to touch them is an abuse of power), technocrats in Brussels take a different view. They tend to view deposits in the technical sense of being loans to banks. You give the bank your money in exchange for interest, and can call the loan at any time (provided not everyone else is doing the same thing, which is the situation now). The bank loans most of your deposit on again. When countries struggle with too much debt, those who have loaned them money get “haircuts”, or less back than they gave. Following this thinking, the EU’s argument is that if we lend money to failing banks, we too must take a haircut to keep them solvent.
[. . .]
So the compromise deal is an ugly one, involving a precedent (confiscation of deposits) which will cast a pallor over the entire European banking system. But the problems are equally great with any other solution. If the banks are left to fail, depositors lose everything except the scraps recovered by administrators. To argue that they, and the country, must be funded directly by the EU, requires the continued willingness of Germany to act against its own economic interests and support an entire continent on its shoulders, impossible without fiscal and political consolidation which no electorate would assent to at present (not that they are asked, usually).
In my opinion, there is no faster way to destroy confidence in your retail banking sector than stealing the money from depositors with no recourse. I have no idea why the European Union is so hell-bent on crushing the banks, but perhaps they have some looney-tunes notion that they can supplant the existing bank system with something directly operated by the ECB or the EU itself.
